Mervyn King gave his strong backing today for spending cuts in George Osborne's first budget as the coalition government revealed the broad thrust of the emergency package due within 50 days of last week's election.

The governor of the Bank of England, speaking on the day unemployment rose to its highest level in 15 years, said the turmoil in Europe over the past few weeks meant it was vital for the government to start tackling Britain's record peacetime budget deficit without delay.

In the tit-for-tat bargaining between the Conservatives and the Liberal Democrats, the chancellor has abandoned his plans for an increase in the inheritance tax threshold to £1m in return for Vince Cable dropping his "mansion tax" on homes.

The Conservatives have won the argument over whether deficit reduction should begin this year rather than next, with the concession that part of the "modest" £6bn savings in non frontline services can be ploughed back into the economy to support jobs. There will be reductions to the child trust fund and high earners will lose their tax credits.

The true extent of the austerity measures planned for the public sector will not be revealed until the full spending review planned for the autumn. The announcement that NHS spending would rise in real terms for each year of the parliament will add to the pressure on those parts of Whitehall that are not ringfenced.

The proposals for tax have also involved compromise. Osborne has agreed to Lib Dem demands for a "substantial increase" in the personal allowance from next April, with the benefits focused on low and middle earners. For their part, the Lib Dems are backing Osborne's determination to scrap Labour's planned "tax on jobs", the scheduled increase in national insurance contributions, due to come in at the start of the next tax year. The wording of the agreement, however, suggested that the clemency would apply only to employers.

Richard Proctor, tax partner at Grant Thornton, said the plan to tax non-business capital gains at "rates similar or close to those applied to income" – 40% or 50% for most of those eligible to pay – would not come in until next year, giving plenty of opportunity for high earners currently paying CGT at 18% to plan ahead.

King gave a sombre assessment of the government's challenge at a press conference to launch the Bank's quarterly inflation report. He said the financial crisis was "far from over", and as debt had moved from the private to the public sector "the banking crisis has turned into a potential sovereign debt crisis".

King added that last weekend's comprehensive package of European and IMF financial support for Greece had provided the opportunity to "tackle excessive fiscal budget deficits".

He said: "The bigger risk at present, given the experience of the last two weeks, would be for a new government not to put in place clear and credible measures to deal with the fiscal deficit."